What is a profit and loss statement?

Understanding profit and loss statements and how they work.

A profit and loss statement is an important document for a business that acts as a financial statement. Also shortened to P&L statement, and similar to income statements, this document reports on the costs, expenses and revenues accrued over a selected time frame. It can act as a helpful indicator of the financial health of a business, enabling strategy teams to plan for the future.

Key takeaways from this section:

  • The profit and loss statement is a document that businesses release yearly or quarterly depending on their business approach and industry. It acts as report on the revenue made by the business in that time, as well as the business costs accrued through expenses.
  • The profit and loss statement is one of three key reports which are released by a business in a year or a quarter – the other two are the balance sheet and the cash flow statement.
  • These three documents together, and when compared to other years and periods, can give a clear picture of the financial health of a business.

Profit and Loss Statements can often be referred to under a number of different titles, including:

  • Statement of financial results
  • Earning statement
  • Expense statement
  • Statement of operations

Regardless of name, profit and loss statements are a good report of whether a company can make any profit, based on the revenue that comes in, and the costs and expenses that go out.

The profit and loss statement will be one of a series of documents that businesses release over the course of a year, normally after each quarter and often as part of a year’s work. The others include the balance sheet and a cash flow statement. The balance sheet gives a rundown of the business’ complete assets, debts and equity, while the cash flow statements gives a summary of where the cash coming into the business is from, and where the money going out of the business is going.

These three documents can be compared against other years and quarters to create forecasts, strategies and more for the financial wellbeing of the company.

Understanding how Profit and Loss Statements work

Most profit and loss statements are produced using a form and format that most businesses will use. The first entry on the statement will be the revenue which is the money brought in by the business’ operations.

The expenses and operating costs that have been paid for by the business are then subtracted from the revenue which leaves the net income. This is what is often referred to as the profit – the profit that the company has made over the period that the profit and loss statement covers. These numbers, especially when compared with previous years and quarters, can give interesting metrics and can be used to calculate other figures to give a fuller picture of the business’ results.

Profit and loss statements FAQs

How do I do a Profit and Loss Statement?

Many profit and loss statements follow a similar format, and often use the same template for their document. You can find a number of templates online which you can use with permission, and these templates should make the process easier and more straightforward.

In very general terms, you’ll need to subtract the overall amount of all of your expenditure, costs and expenses from the revenue you’ve made through the stated period. This will give you the profit you’ve made over the year or through the quarter.

What are the three main lines on a Profit and Loss Statement?

Generally, each profit and loss statement has three lines of values which represent different parts of the company’s financial make up.

  1. The first line, or the top line, is for your business’ revenue – how much the business made.
  2. The second line is for your business’ expenses – how much your business spent in costs and expenditure.
  3. The final line, known as the bottom line, is the profit your business has made. This is the revenue, minus the costs and expenditure.

How do you read a Profit and Loss Statement?

Profit and loss statements can seem complex and sometimes daunting, but in reality, they are simply a report on everything your business has earnt, everything it has spent and the resulting profit.

You can find entries for the money you have made on the top line, and you can find the amount your business has spent in the expenses line. The most important part of the entire P&L document however, is the bottom line – the profit. This number will be the best indicator of how well your business is doing financially, and how much you need to do to improve its condition.

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